1 Are the Contrarians Right and
Wrong?
Is the United States demographically positioned for years of
economic growth? I am, perhaps naturally, a contrarian, in many things, and
certainly at the moment, with markets seeming to defy gravity. Yet what if I,
and most contrarians, are wrong, and the (US) markets actually have years of
continued growth ahead of them? Is this possible? Is if different this time,
and if so, why is it different. Or are historic indicators that signal doom strong
enough to overcome the current "sweet spot" that enables sustained
growth?
1.1 Is a crash
due?
There are too many indicators that suggest a crash is due, ranging
from record or near record EPS (earnings per share) levels, increasing consumer
financial leverage, expanding sub-prime auto loans coupled with ever longer loan
periods on vehicles, to inconsistent messages from the FED, the US debt and
deficits, concern at the ability of the Trump administration to achieve any
meaningful tax or economic program, to global debt levels and the real threat
of a trade war with China, Russia and possibly Europe. There are simply so many
potential triggers that could push investor confidence over the edge, and
"buy the dip" has not, this recent post-election cycle, been
adequately tested against a real dip of 5% or more.
1.2 Is
Unemployment as low as official figures?
Counter balance the signs of potential doom with another terrible
number, so terrible that it actually might be the number that enables
multi-year sustained economic growth in the United States: Real Unemployment.
Not the number produced by the BLS (Bureau of Labor Statistics), which is based
not on the number of people not working, but on the number of people collecting
an unemployment benefit. That number is now in the high 4% range, a
historically low number, and a number that fills economists with fear of wage
and then wider inflation.
But if the Shadow Stats (http://www.shadowstats.com/) number is
correct, then over 22% unemployment is the correct number of the United States
today. This is based on the Shadow Stats use of historic methodologies for the
determination of unemployment (and inflation, etc). Over the decades, the US
Government's methodology for calculation these key metrics has changed. Shadow
Stats continues to use the earlier methodology, on the assumption that while
much has changed, the primary methodologies for calculating unemployment, for
example, remain the same.
This is in part bolstered by the labor participation rate, which
remains at historically low level, even with a recent up-tick in participation.
Current labor force participation rate is around 62%, the same level as 1978.
The gap between the highest participation rate of 67% in 2007 and the current
participation rate amount to approximately 6.4 million potential workers.
The BLS tells us that the current Civilian Labor Workforce is 160
million. This means that the 4% drop equates to roughly 6.4 million potential
workers who are not in the workforce. If 4% unemployment is this historical “full
employment” number, then we are at or close to full employment, meaning there
is an additional 4% of the workforce that is untapped. Shadow Stats estimates
the number of additional discouraged worker who want a job to be around 4.75
million (as at June 2016).
2 Demographic "sweet spot"
So the US has seen a dramatic fall in the labor participation, and
an explosion of unemployment to the 20% level, resulting in a huge pool of
unemployed working age individuals. While the "dependency ratio" has
not improved, at least one element of the demographic sweet spot is definitely
in place.
So what is the demographic sweet spot, and how can a nation
experience this twice?
As counties have matured over the past century, a trend has been
seen that is now known as the demographic sweet spot. Effectively this is the
period of time between the fall in birth-rates and the exhaustion of the
available surplus working age population. That surplus available working age
population is created through a higher dependency ratio (the number of working
age individual for every dependent - child or elderly). As infant mortality
rates fall, younger, and then working age, populations surge. At the same time,
longevity improvements take some time to filter through, so the number of
elderly dependents remains low.
The dependency ratio is important because the greater the number
of working age individuals to retired or young, the greater the available pool
of labor. The US currently has a low dependency ratio, which argues against
there being a pool of available labor, yet we know from participation rates,
unemployment rates, and the growth in the over-65 workforce, that the
dependency ratio in the US is not acting as a drag on potential productivity
increase.
This sweet spot increases the available human capital, and fuels
economic growth through the increased productive capacity of the country.
Might the United States be in (again) that sweet spot, with a very
large pool of available labor, ready to join (or re-join) the workforce once
jobs are available?
3 If Shadow Stats is mostly right
Basically it comes down to the question; is Shadow Stats right on
the unemployment rate, coupled with the labor market participation rate. If
they are, then there is a massive pool of untapped labor available to industry.
Bringing that labor into the workforce will require new jobs, and wage
inflation.
Yet wage inflation is completely normal in developing countries
that are going through their sustained growth periods when they reach the
demographic sweet spot. The available workforce increases, jobs come in to
absorb the available labor, skill improve, wages increase as the available
labor at previous rates is soaked up, new jobs are created, etc.
4 If Shadow Stats is very wrong.
Yet is Shadow Stats is wrong, and the unemployment rates are
actually lower, and that low labor market participation rates are low because
of a systemic shift in workforce expectations and available jobs at any
economic rate, then we are Doomed, Doomed. Well, maybe not doomed, but we
cannot expect to see a demographically based sustained growth period.
If we are not in for such growth, then we should expect one of the
factors mentioned in the opening paragraphs to be the trigger for a market
collapse. If that does happen, all bets are off, and it will not be different
this time.
The US economy's primary engine is consumption by consumers. Growth in the consumer portion of GDP clearly illustrates where the boom has been anchored. So the most likely cause of a 'bust' cycle could come from a rapid drop in consumer confidence. That, of course, could be caused by all sorts of things but, fundamentally, confidence rests on jobs, social stability, and rising expectations.
ReplyDeleteSo, your ponderings on the real state of jobs is very appropriate. If there are no jobs then consumer confidence will fall, bust will follow. I think other consumer-centered issues (such as social stability) are a bigger short-term threat to consumer confidence though.
At the million-foot level, society is not a market. The American model of treating it as such (especially in a consumer-centric economy) means collapse will come.
Looking at the other elements of GDP (change in GDP being a traditional measure of boom/bust), Government spending and systemic Investment have barely changed through the last boom cycle so you'd expect any bust-risk there would be a sharp decrease in either. For example, one dropping from Administration decisions not to spend and the other from a drop in business confidence. However, both are easily catered for if you have sufficient system-wide credit. That's how the GFC in 2008 was addressed. System credit hinges on the enthusiasm of others to lend to you - and that seems astonishingly buoyant.
Export and Import change have also been reasonable contributors to the boom cycle of recent times.
US exports are dominated by sales of planes, vehicles, pharmaceuticals, and petroleum products which, you'd think, will retain solid demand - unless the American government steadily annoyed the governments of buyer-nations... So, a rapid decline in exports would certainly be a trigger for loss of jobs and business/consumer confidence. That would rapidly devolve into bust. Rising exports could, conversely, trigger more boom. But it hinges on the US retaining willing customers. There is real risk with that assumption right now.
And, finally, imports. Imports have risen sharply through the boom which is, of course, what you'd expect. Those happy consumers will spend some of their confidence on imports. So any deterioration in imports actually raises risk in some alarming places. Most notably, those exact same consumers - unless jobs arrive as domestic capacity replaces the imports. The timing for those sorts of scenarios is, of course, never going to work. Plus, the US's top imports mirror its exports. So slashing imports through trade-wars or increasing prices via tariffs is also likely to severely impact the US export engine. If you won't buy my cars then I'm not buying yours. It's pretty basic.
And it's also going to annoy an awful lot of consumers who won't have their choice of cars, clothes, phones, and myriad other things. Their confidence will be damaged on many fronts, bust will follow.
So, jobs matter. But so, among many things, does the balance of trade, the confidence of consumers (measured across many aspects), and the ready availability of credit to keep things running smoothly. Tamper with any one of those and the risk of trouble soars. But finessed right, the boom could continue for quite a while.
So, perhaps the best measures of whether boom or bust occurs next relate to what the people who guide consumer confidence, who manage trade positions, and who provide the confidence for creditors actually do next.
And based on the track-record of the US political system and the US Government in recent times, buying a few Chinese-made hard-hats might be a good investment...